PROGRESS SOFTWARE CORP /MA 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. However, actual results may differ from these estimates. The most significant estimates relate to: the timing and amounts of revenue recognition, including the determination of the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and the transaction price allocated to performance obligations; the realization of tax assets and estimates of tax liabilities; fair values of investments in marketable securities; intangible assets and goodwill valuations; the recognition and disclosure of contingent liabilities; the collectability of accounts receivable; and assumptions used to determine the fair value of stock-based compensation. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 to our Consolidated Financial Statements in Item 8 of our 2020 10-K. Cautionary Note Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we “believe,” “may,” “could,” “would,” “might,” “should,” “expect,” “intend,” “plan,” “target,” “anticipate” and “continue,” are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are a number of factors that could cause actual results or future events to differ materially from those anticipated by the forward-looking statements, including, without limitation: (1) Economic, geopolitical and market conditions can adversely affect our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price. (2) We 27 may fail to achieve our financial forecasts due to such factors as delays or size reductions in transactions, fewer large transactions in a particular quarter, fluctuations in currency exchange rates, or a decline in our renewal rates for contracts. (3) Our ability to successfully manage transitions to new business models and markets, including an increased emphasis on a cloud and subscription strategy, may not be successful. (4) If we are unable to develop new or sufficiently differentiated products and services, or to enhance and improve our existing products and services in a timely manner to meet market demand, partners and customers may not purchase new software licenses or subscriptions or purchase or renew support contracts. (5) We depend upon our extensive partner channel and we may not be successful in retaining or expanding our relationships with channel partners. (6) Our international sales and operations subject us to additional risks that can adversely affect our operating results, including risks relating to foreign currency gains and losses. (7) If the security measures for our software, services, other offerings or our internal information technology infrastructure are compromised or subject to a successful cyber-attack, or if our software offerings contain significant coding or configuration errors, we may experience reputational harm, legal claims and financial exposure. (8) We have made acquisitions, and may make acquisitions in the future, including the pending acquisition of Kemp, and those acquisitions may not be successful, may involve unanticipated costs or other integration issues or may disrupt our existing operations. (9) Delay or failure to complete the Kemp acquisition, or delay or failure to realize the expected synergies and benefits of the Kemp acquisition could negatively impact our future results of operations and financial condition; (10) The continuing impact of the coronavirus disease (COVID-19) outbreak on our employees, customers, partners, and the global financial markets could adversely affect our business, results of operations and financial condition. For further information regarding risks and uncertainties associated with Progress' business, please refer to Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, and in Part I, Item 1A (Risk Factors) in our 2020 10-K. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure you that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make. Use of Constant Currency Revenue from our international operations has historically represented a substantial portion of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries strengthen, our consolidated results stated in U.S. dollars are positively impacted. As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Impact of COVID-19 In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. COVID-19 has impacted the health and well-being of people on a global basis, restricted travel worldwide and caused significant economic disruption and uncertainty. Our fiscal 2020 results of operations, as well as the financial results of our customers and partners, were negatively impacted by COVID-19. The COVID-19 pandemic continues to have widespread and unpredictable impacts on people, businesses, and organizations around the world. During the second and third fiscal quarters of 2021, we saw greater demand for our products and solutions across almost all of our product lines. Although the impacts of COVID-19 continue to evolve, and the rate and pace of recovery from COVID-19 differs by geography and industry, we expect demand for our products and solutions to continue to be strong during the remainder of fiscal 2021. We are continuing our return to our offices on a limited basis, where permissible, with limited business travel as needed, while the well-being of our employees remains our priority. We are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration and nature of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners and other factors identified in Part II, Item 1A “Risk Factors” in this Form 10-Q. We will continue to evaluate the scope and extent of the impact to our business, consolidated results of operations, and financial condition. Overview Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") provides the best products to develop, deploy and manage high-impact business applications. Our comprehensive product stack is designed to make technology teams more 28 productive and we have a deep commitment to the developer community, both open source and commercial alike. With Progress, organizations can accelerate the creation and delivery of strategic business applications, automate the process by which apps are configured, deployed and scaled, and make critical data and content more accessible and secure—leading to competitive differentiation and business success. Over 1,700 independent software vendors, 100,000 enterprise customers, and three million developers rely on Progress to power their applications. Beginning in the second quarter of fiscal year 2021, we operate as one operating segment: software products to develop, deploy, and manage high-impact business applications. Progress previously reported results based on three segments but began operating as one business segment in the second fiscal quarter of 2021. The key tenets of our strategic plan and operating model are as follows: Trusted Partner of the Best Products to Develop, Deploy and Manage High Impact Business Applications . A key element of our strategy is centered on providing the platform and tools enterprises need to build modern, strategic business applications. We offer these products and tools to both new customers and partners as well as our existing partner and customer ecosystems. This strategy builds on our inherent DNA and our vast experience in application development that we've acquired over the past 40 years. Focus on Customer and Partner Retention to Drive Recurring Revenue and Profitability . Our organizational philosophy and operating principles focus primarily on customer and partner retention and success and a streamlined operating approach in order to more efficiently drive predictable and stable recurring revenue. Total Growth Strategy Driven by Accretive M&A. We are pursuing a total growth strategy driven by accretive acquisitions of businesses within the infrastructure software space, with products that appeal to both IT organizations and individual developers. These acquisitions must meet strict financial and other criteria, which will enable us to drive significant stockholder returns by providing scale and increased cash flows. In April 2019, we acquired Ipswitch, Inc., in October 2020, we acquired Chef Software, Inc., and as described below, in September 2021, we entered into a definitive agreement to acquire Kemp. The Ipswitch and Chef acquisitions met, and the acquisition of Kemp is expected to meet, our strict financial criteria. Kemp powers the always-on application experience that enterprises and service providers need to succeed. The purchase price for Kemp will be approximately $258 million and we will fund the purchase price with existing cash balances. With the Kemp acquisition, we will extend our portfolio of market-leading products in DevOps, Application Development, Data Connectivity and Digital Experience, adding Application Experience Management (AX). We will continue to evaluate other possible acquisitions designed to expand our business and drive significant stockholder returns. Holistic Capital Allocation Approach . We have adopted a shareholder friendly capital allocation policy that utilizes dividends and share repurchases to return capital to stockholders. Pursuant to our capital allocation strategy that we implemented in September 2017, we have returned approximately 20% of our annual cash flows from operations to stockholders in the form of dividends. We also intend to repurchase our shares sufficient to offset dilution from our equity plans. In January 2020, our Board of Directors increased the total share repurchase authorization from $75.0 million to $250.0 million. In the three months ended August 31, 2021, we did not repurchase any shares of our common stock. As of August 31, 2021, there was $155.0 million remaining under the current authorization. We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and have paid quarterly dividends since that time. On September 21, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on December 15, 2021 to shareholders of record as of the close of business on December 1, 2021.We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy. Our existing cash balances, together with funds generated from operations and amounts available under our credit facility, are expected to be sufficient to finance our operations and meet our foreseeable cash requirements, including quarterly cash dividends and stock repurchases to Progress stockholders, as applicable, through the foreseeable future. Our cash position will be reduced by the acquisition of Kemp as well as by any additional acquisitions we complete in the future and we may incur additional debt obligations in connection with those future acquisitions. 29 We also believe that our financial resources have allowed, and will continue to allow us to manage the impact of COVID-19 on our business operations for the foreseeable future. We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations. Since approximately one-third of our revenue is denominated in foreign currency, and given the volatility in the global economy created by COVID-19, our revenue results in fiscal year 2021 have been impacted by fluctuations in foreign currency exchange rates. We will derive additional revenues denominated in foreign currency from Kemp's international operations, which could further impact our revenue results in fiscal year 2021, if the Kemp acquisition Closing occurs in fiscal year 2021. Select Performance Metrics: Management evaluates our financial performance using a number of financial and operating metrics. These metrics are periodically reviewed and revised to reflect changes in our business. Annual Recurring Revenue (ARR) We are providing an ARR performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources has increased in recent years. ARR represents the annualized contract value for all active and contractually binding term-based contracts at the end of a period. ARR includes maintenance, software upgrade rights, public cloud and on-premises subscription-based transactions and managed services. ARR mitigates fluctuations due to seasonality, contract term and the sales mix of subscriptions for term-based licenses and SaaS. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace either of those items. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers. We define ARR as the annual recurring revenue of term-based contracts from all customers at a point in time. We calculate ARR by taking monthly recurring revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts, additional usage and monthly subscriptions. Our ARR was $444.0 million and $356.0 million as of August 31, 2021 and 2020, respectively, which is an increase of 25% year-over-year. The growth in our ARR is primarily driven by the acquisition of Chef. Net Dollar Retention Rate We calculate net dollar retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end (“Prior Period ARR”). We then calculate the ARR from these same customers as of the current period end (“Current Period ARR”). Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the net dollar retention rate. Our net dollar retention rates have generally ranged between 98% and 101% for all periods presented. Our high net dollar retention rates illustrate our predictable and durable top line performance. 30 Results of Operations Revenue Three Months Ended % Change (In thousands) August 31, 2021 August 31, 2020 As Reported Constant Currency Revenue $ 147,417 $ 109,699 34 % 33 % Nine Months Ended % Change (In thousands) August 31, 2021 August 31, 2020 As Reported Constant Currency Revenue $ 391,185 $ 319,765 22 % 20 % Total revenue increased in both the third fiscal quarter and nine month period ended August 31, 2021 as compared to the same periods last year primarily due to our acquisition of Chef in the fourth quarter of fiscal year 2020, as well as increases in our DataDirect, OpenEdge, and Ipswitch product offerings. Software License Revenue Three Months Ended % Change (In thousands) August 31, 2021 August 31, 2020 As Reported Constant Currency Software Licenses $ 51,930 $ 27,514 89 % 87 % As a percentage of total revenue 35 % 25 % Nine Months Ended % Change (In thousands) August 31, 2021 August 31, 2020 As Reported Constant Currency Software Licenses $ 115,354 $ 77,806 48 % 46 % As a percentage of total revenue 29 % 24 % Software license revenue increased in both the third fiscal quarter and first nine months of fiscal year 2021 as compared to the same periods last year primarily due to our acquisition of Chef and increases in license sales in our DataDirect, OpenEdge, and Ipswitch product offerings. Maintenance and Services Revenue Three Months Ended % Change (In thousands) August 31, 2021 August 31, 2020 As Reported Constant Currency Maintenance $ 82,875 $ 72,764 14 % 13 % As a percentage of total revenue 56 % 66 % Services 12,612 9,421 34 % 33 % As a percentage of total revenue 9 % 9 % Total maintenance and services revenue $ 95,487 $ 82,185 16 % 15 % As a percentage of total revenue 65 % 75 % 31 Nine Months Ended % Change (In thousands) August 31, 2021 August 31, 2020 As Reported Constant Currency Maintenance $ 239,921 $ 214,506 12 % 10 % As a percentage of total revenue 61 % 67 % Services 35,910 27,453 31 % 29 % As a percentage of total revenue 10 % 9 % Total maintenance and services revenue $ 275,831 $ 241,959 14 % 12 % As a percentage of total revenue 71 % 76 % Maintenance and services revenue both increased in the third fiscal quarter and first nine months of fiscal year 2021 as compared to the same periods last year primarily due to our acquisition of Chef and increased maintenance revenue from our OpenEdge and Ipswitch product lines. Revenue by Region Three Months Ended % Change (In thousands) August 31, 2021 August 31, 2020 As Reported Constant Currency North America $ 93,880 $ 62,927 49 % 49 % As a percentage of total revenue 64 % 57 % Europe, the Middle East and Africa ("EMEA") $ 40,999 $ 37,447 9 % 6 % As a percentage of total revenue 28 % 34 % Latin America $ 5,298 $ 3,547 49 % 47 % As a percentage of total revenue 3 % 3 % Asia Pacific $ 7,240 $ 5,778 25 % 23 % As a percentage of total revenue 5 % 6 % Nine Months Ended % Change (In thousands) August 31, 2021 August 31, 2020 As Reported Constant Currency North America $ 236,479 $ 184,904 28 % 28 % As a percentage of total revenue 60 % 58 % Europe, the Middle East and Africa ("EMEA") $ 122,560 $ 106,592 15 % 9 % As a percentage of total revenue 31 % 33 % Latin America $ 12,544 $ 10,893 15 % 20 % As a percentage of total revenue 3 % 4 % Asia Pacific $ 19,602 $ 17,376 13 % 9 % As a percentage of total revenue 6 % 5 % Total revenue generated in North America increased $31.0 million and $51.6 million in the third fiscal quarter and first nine months of fiscal year 2021, respectively. The increases were primarily due to our acquisition of Chef, increased OpenEdge and DataDirect license revenue, and increased Ipswitch license and maintenance revenue. The increase in revenue generated in both EMEA and Asia Pacific was due to our acquisition of Chef, as well as increased OpenEdge and Sitefinity revenue in EMEA. Revenue in Latin America increased in the third fiscal quarter and first nine months of 2021 due to higher license and maintenance revenue in our OpenEdge product line. In the first nine months of fiscal year 2021 revenue generated in markets outside North America represented 40% of total revenue compared to 39% of total revenue on a constant currency basis. In the first nine months of fiscal year 2020 revenue generated in markets outside North America represented 42% of total revenue compared to 42% of total revenue on a constant currency basis. 32 Cost of Software Licenses Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Change August 31, 2021 August 31, 2020 Change Cost of software licenses $ 1,574 $ 1,103 $ 471 43 % $ 3,763 $ 3,302 $ 461 14 % As a percentage of software license revenue 3 % 4 % 3 % 4 % As a percentage of total revenue 1 % 1 % 1 % 1 % Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication, and packaging. The increases in all periods were the result of higher payments of royalties to third parties as compared to the prior period. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix. Cost of Maintenance and Services Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Change August 31, 2021 August 31, 2020 Change Cost of maintenance and services $ 14,895 $ 11,971 $ 2,924 24 % $ 42,887 $ 35,607 $ 7,280 20 % As a percentage of maintenance and services revenue 16 % 15 % 16 % 15 % As a percentage of total revenue 10 % 11 % 11 % 11 % Components of cost of maintenance and services: Personnel related costs $ 10,056 $ 8,258 $ 1,798 22 % $ 29,634 $ 25,105 $ 4,529 18 % Contractors and outside services 3,504 2,894 610 21 % 9,539 8,283 1,256 15 % Hosting and other 1,335 819 516 63 % 3,714 2,219 1,495 67 % Total cost of maintenance and services $ 14,895 $ 11,971 $ 2,924 24 % $ 42,887 $ 35,607 $ 7,280 20 % Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education. The increases in all periods were primarily due to increased headcount, hosting, and outside services costs resulting from our acquisition of Chef. Amortization of Intangibles Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change Amortization of intangibles $ 3,599 $ 1,664 116 % $ 10,719 $ 4,974 116 % As a percentage of total revenue 2 % 2 % 3 % 2 % Amortization of intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. The increases in both periods shown were primarily due to the acquisition of Chef. Gross Profit Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change Gross profit $ 127,349 $ 94,961 34 % $ 333,816 $ 275,882 21 % As a percentage of total revenue 86 % 87 % 85 % 86 % 33 Our gross profit increased primarily due to the increase in revenue, offset by the increase of costs of maintenance and services and the amortization of intangibles, each as described above. Sales and Marketing Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Change August 31, 2021 August 31, 2020 Change Sales and marketing $ 29,737 $ 22,186 $ 7,551 34 % $ 88,468 $ 68,100 $ 20,368 30 % As a percentage of total revenue 20 % 20 % 23 % 21 % Components of sales and marketing: Personnel related costs $ 25,538 $ 19,243 $ 6,295 33 % $ 76,678 $ 58,472 $ 18,206 31 % Contractors and outside services 833 388 445 115 % 2,189 1,257 932 74 % Marketing programs and other 3,366 2,555 811 32 % 9,601 8,371 1,230 15 % Total sales and marketing $ 29,737 $ 22,186 $ 7,551 34 % $ 88,468 $ 68,100 $ 20,368 30 % Sales and marketing expenses increased in both periods shown, primarily due to increased personnel related costs associated with our acquisition of Chef. Product Development Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Change August 31, 2021 August 31, 2020 Change Product development costs $ 25,616 $ 20,676 $ 4,940 24 % $ 76,579 $ 64,117 $ 12,462 19 % As a percentage of total revenue 17 % 19 % 20 % 20 % Components of product development costs: Personnel related costs $ 24,550 $ 20,027 $ 4,523 23 % $ 73,379 $ 62,139 $ 11,240 18 % Contractors and outside services 934 460 474 103 % 2,645 1,583 1,062 67 % Other product development costs 132 189 (57) (30) % 555 395 160 41 % Total product development costs $ 25,616 $ 20,676 $ 4,940 24 % $ 76,579 $ 64,117 $ 12,462 19 % Product development expenses increased in both periods shown, primarily due to increased personnel related costs associated with our acquisition of Chef, as well as an increase in contractors and outside services and other product development costs. General and Administrative Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Change August 31, 2021 August 31, 2020 Change General and administrative $ 16,451 $ 13,514 $ 2,937 22 % $ 46,335 $ 38,702 $ 7,633 20 % As a percentage of total revenue 11 % 12 % 12 % 12 % Components of general and administrative: Personnel related costs $ 12,732 $ 10,768 $ 1,964 18 % $ 38,046 $ 31,121 $ 6,925 22 % Contractors and outside services 2,522 2,238 284 13 % 6,037 5,921 116 2 % Other general and administrative costs 1,197 508 689 136 % 2,252 1,660 592 36 % Total cost of general and administrative $ 16,451 $ 13,514 $ 2,937 22 % $ 46,335 $ 38,702 $ 7,633 20 % General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses increased in both periods shown, primarily due to higher personnel costs associated with our acquisition of Chef, as well as an increase in contractors and outside services and other general and administrative costs. 34 Amortization of Intangibles Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change Amortization of intangibles $ 7,978 $ 4,176 91 % $ 22,836 $ 12,484 83 % As a percentage of total revenue 5 % 4 % 6 % 4 % Amortization of intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology. Amortization of intangibles increased in both periods shown, due to the addition of Chef intangible assets, as discussed above. Restructuring Expenses Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change Restructuring expenses $ 40 $ 91 (56) % $ 1,133 $ 1,826 (38) % As a percentage of total revenue — % — % — % 1 % Restructuring expenses recorded in the third quarter and first nine months of fiscal year 2021 primarily relate to the restructuring activities that occurred in the fourth quarter of fiscal year 2020 resulting from the acquisition of Chef. Restructuring expenses recorded in the third quarter and first nine months of fiscal year 2020 are comprised mostly of costs related to the Ipswitch and Cognitive restructuring actions of 2019. See the Liquidity and Capital Resources section of this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Acquisition-Related Expenses Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change Acquisition-related expenses $ 1,481 $ 1,125 32 % $ 2,721 $ 1,439 89 % As a percentage of total revenue 1 % 1 % 1 % — % Acquisition-related costs are expensed as incurred and include those costs incurred as a result of a business combination. These costs consist of professional service fees, including third-party legal and valuation-related fees. Acquisition-related expenses increased in the third quarter and first nine months of fiscal year 2021 due to the acquisition of Chef, as well as our pursuit of other acquisition opportunities. Acquisition-related expenses in the same period of fiscal year 2020 were related to the acquisition of Ipswitch. Income from Operations Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change Income from operations $ 46,046 $ 33,193 39 % $ 95,744 $ 89,214 7 % As a percentage of total revenue 31 % 30 % 24 % 28 % Income from operations increased in both periods shown due to increases of revenue, offset by an increase in costs of revenue and operating expenses as shown above. 35 Other (Expense) Income, Net Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change Interest expense $ (6,510) $ (2,302) (183) % $ (13,625) $ (7,692) (77) % Interest income and other, net 99 110 (10) % 222 443 (50) % Foreign currency loss, net (128) (770) 83 % (1,006) (1,957) 49 % Total other expense, net $ (6,539) $ (2,962) (121) % $ (14,409) $ (9,206) (57) % As a percentage of total revenue (4) % (3) % (4) % (3) % Other expense, net, increased in both the third fiscal quarter and the nine month period ended August 31, 2021 as compared to the same periods in the prior year. This is a result of increased interest expense associated with our convertible senior notes, which we issued in April 2021. In both periods shown, the increases in interest expense were offset by lower foreign currency loss due to lower costs of forward points on our outstanding forward contracts. Provision for Income Taxes Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change Provision for income taxes $ 8,531 $ 6,254 36 % $ 17,841 $ 17,947 (1) % As a percentage of total revenue 6 % 6 % 5 % 6 % Our effective tax rate was 22% in the third fiscal quarter of 2021 compared to 21% in the third fiscal quarter of 2020. The increase is due primarily to discrete tax benefits in the third fiscal quarter of 2020. There were no significant discrete tax items in the third fiscal quarter of 2021. Net Income Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change Net income $ 30,976 $ 23,977 29 % $ 63,494 $ 62,061 2 % As a percentage of total revenue 21 % 22 % 16 % 19 % 36 Liquidity and Capital Resources Cash, Cash Equivalents and Short-Term Investments (In thousands) August 31, 2021 November 30, 2020 Cash and cash equivalents $ 379,895 $ 97,990 Short-term investments 3,782 8,005 Total cash, cash equivalents and short-term investments $ 383,677 $ 105,995 The increase in cash, cash equivalents and short-term investments of $277.7 million from the end of fiscal year 2020 was due to cash inflow from the issuance of the convertible senior notes of $349.2 million, cash inflows from operations of $134.6 million, $6.8 million in cash received from the issuance of common stock, a decrease in escrow receivable of $2.1 million, and the effect of exchange rates on cash of $0.6 million. These cash inflows were offset by payments of debt obligations of $111.7 million, cash paid for the purchase of capped calls of $43.1 million in connection with the convertible note offering, repurchases of common stock of $35.0 million, dividend payments of $23.4 million, and purchases of property and equipment of $2.7 million. Except as described below, there are no limitations on our ability to access our cash, cash equivalents and short-term investments. As of August 31, 2021, $30.7 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries. Foreign cash includes unremitted foreign earnings, which are invested indefinitely outside of the U.S. As such, it is not available to fund our domestic operations. If we were to repatriate these earnings, we may be subject to income tax withholding in certain tax jurisdictions and a portion of the repatriated earnings may be subject to U.S. income tax. However, we do not anticipate that this would have a material adverse impact on our liquidity. Share Repurchase Program In January 2020, our Board of Directors increased the total share repurchase authorization from $75 million to $250 million. In each of the three months ended August 31, 2021 and August 31, 2020, we did not repurchase any shares of our common stock. In the nine months ended August 31, 2021 and August 31, 2020, we repurchased and retired 0.8 million shares for $35.0 million and 0.4 million shares for $20.0 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program. As of August 31, 2021, there was $155.0 million remaining under the current authorization. Dividends We began paying quarterly cash dividends to Progress stockholders in December 2016, with annual increases in the quarterly cash dividend since such time. On June 22, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that was paid on September 15, 2021. On September 21, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on December 15, 2021 to shareholders of record as of the close of business on December 1, 2021. Restructuring Activities During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef (Note 6). This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Chef. For the three months ended August 31, 2021, we incurred minimal expenses relating to this restructuring. For the nine months ended August 31, 2021, we incurred expenses of $0.9 million relating to this restructuring. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2021. Accordingly, the balance of the restructuring reserve, which is not material, is included in other accrued liabilities on the condensed consolidated balance sheet at August 31, 2021. We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2021. In September 2021, we closed a facility as part of this restructuring and expect to incur restructuring charges of approximately $2.9 million during the fourth quarter of fiscal year 2021. Credit Facility Our credit facility provides for a $301.0 million secured term loan and a $100.0 million secured revolving line of credit. The revolving line of credit may be increased by up to an additional $125.0 million if the existing or additional lenders are willing to 37 make such increased commitments. The revolving line of credit has sublimits for swing line loans up to $25.0 million and for the issuance of standby letters of credit in a face amount up to $25.0 million. The credit facility matures on April 30, 2024, when all amounts outstanding will be due and payable in full. The outstanding balance of the term loan as of August 31, 2021 was $272.8 million, with $24.5 million due in the next 12 months. The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium. The interest rate as of August 31, 2021 was 2.13%. As of August 31, 2021, there were no amounts outstanding under the revolving line of credit and $2.4 million of letters of credit outstanding (Note 7). Convertible Senior Notes In April 2021, we issued, in a private placement, Convertible Senior Notes with an aggregate principal amount of $325 million, due April 15, 2026, unless earlier repurchased, redeemed or converted. There are no required principal payments prior to the maturity of the Notes. In addition, the Company also granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 million aggregate principal amount of the Notes, for settlement within a 13-day period beginning on, and including, April 13, 2021, of which $35 million of additional Notes were purchased for total proceeds of $360 million. The Notes bear interest at an annual rate of 1%, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021 (Note 7). Cash Flows From Operating Activities Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Net income $ 63,494 $ 62,061 Non-cash reconciling items included in net income 69,191 48,391 Changes in operating assets and liabilities 1,917 (8,367) Net cash flows from operating activities $ 134,602 $ 102,085 The year over year increase in cash generated from operations was primarily due to the addition of Chef for a full year, as well as particularly strong collections of our receivables, partially offset by increased expenses. Our gross accounts receivable as of August 31, 2021 decreased by $7.7 million from the end of fiscal year 2020 and our days sales outstanding (DSO) in accounts receivable increased to 54 days from 49 days in the fiscal third quarter of 2020 due to the timing of billings and collections. Cash Flows From (Used in) Investing Activities Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Net investment activity $ 4,150 $ 9,892 Purchases of property and equipment (2,741) (3,419) Decrease in escrow receivable and other 2,330 — Net cash flows from investing activities $ 3,739 $ 6,473 Net cash outflows and inflows of our net investment activity are generally a result of the timing of our purchases and maturities of securities, which are classified as cash equivalents or short-term securities. We also purchased $2.7 million of property and equipment in the first nine months of fiscal year 2021, as compared to $3.4 million in the first nine months of fiscal year 2020. 38 Cash Flows From (Used in) Financing Activities Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Proceeds from stock-based compensation plans $ 9,247 $ 9,027 Repurchases of common stock (35,000) (20,000) Payment of principal on long-term debt (111,669) (7,525) Proceeds from issuance of senior convertible notes, net of issuance costs of $9,900 350,100 — Purchase of capped calls (43,056) — Dividend payments to shareholders (23,372) (22,358) Payment of debt issuance costs (904) — Other financing activities (2,398) (4,072) Net cash flows from (used in) financing activities $ 142,948 $ (44,928) During the first nine months of fiscal year 2021, we received $349.2 million in net proceeds from the issuance of convertible senior notes and paid $43.1 million to purchase capped calls in connection with the convertible note offering. We also received $9.2 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $9.0 million in the first nine months of fiscal year 2020. Further, we repurchased $35.0 million of our common stock under our share repurchase plan compared to $20.0 million in the same period of the prior year. We also made payments on our long-term debt of $111.7 million (including a $98.5 million repayment on the revolving line of credit) in the first nine months of fiscal year 2021 compared to $7.5 million in the same period of the prior year. Finally, we made dividend payments of $23.4 million to our shareholders during the first nine months of fiscal year 2021, as compared to $22.4 million in the first nine months of fiscal year 2020. Indemnification Obligations We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial. Liquidity Outlook We believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our cash requirements for the foreseeable future. We do not contemplate a need for any foreign repatriation of the earnings which are deemed invested indefinitely outside of the U.S. Our foreseeable cash needs include our planned capital expenditures, debt repayments, quarterly cash dividends, share repurchases, acquisitions, lease commitments, restructuring obligations and other long-term obligations. We also believe that our financial resources will allow us to manage the on-going impact of COVID-19 on our business operations for the foreseeable future. Legal and Other Regulatory Matters See discussion regarding legal and other regulatory matters in Part II, Item 1. Legal Proceedings. Off-Balance Sheet Arrangements We have no “off-balance sheet arrangements” within the meaning of Item 303(a)(4) of Regulation S-K. 39 Contractual Obligations There have been no material changes to our contractual obligations disclosed in tabular format in our 2020 10-K. Recent Accounting Pronouncements Refer to Note 1 - Nature of Business and Basis of Presentation (Part I, Item 1 of this Form 10-Q) for further discussion.